Vogel? Haven't heard, but know he's leaving a wealthy man.
Yannus has been at NBMO for awhile - Renegar just came onboard.
Here's the bulk of Grubman - OCR'd somewhat imprecisely:
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10/22/98 WinStar Communication $l9.56, l-S, TGNT $52.00) Jack B. Grubman --OPINION:
Lucent and WinStar announced an agreement where Lucent will provide $2
billion of vendor financing ($500 million on LU's balance sheet, the rest syndicated) to WinStar at an interest rate of the lower of LIBOR plus 350 basis points or Prime + 250 basis points. At current tirmolt rates this would mean an 8.5% cost of debt (vs. WCII's current 16.8%). Furthermore, as WinStar meets certain performance goals, the rate will decline to LIBOR plus 2.5% and eventually LIBOR plus 2%. The vendor financing will come in 4 tranches and Lucent will provide, in addition to capital expertise, in building and designing networks and implementing and integrating certain support Systems to get winstar's networks up and running. This move by LU reinforces what we suggested in our conference call on 10/9--that those CLECs that were already well capitalized and already had viable business plans would have no problem in obtaining additional financing via vendor financing, the capital markets or strategic investors- -and we believe that there will be more evidence supporting this over the next several weeks.
An interesting wrinkle in this agreement is a "best of breed" position
where WinStar hal the opportunity to choose non-Lucent vendors for
equipment Lucent does not provide. Up to 35% of the $2 billion of
financing can be channeled to non-Lucent suppliers which means WinStar
can spend up to $700 million of this funding on equipment such as radios that Lucent does not make. However, if a non-Lucent vendor chooses to OEM their particular product through Lucent that will not count against the 35% non-Lucent threshold. In other words, with a $2 billion umbrella financing and a 35% non-Lucent provision, winstar has all the money it needs to tap all the suppliers available for the entire fleet of network equipment needed to build out its markets.
FULLY FINANCED POSITION RAISES WCII's PRICE TARGET
Since winstar was currently fully funded through 40 markets with only an extra $300 million required to simply buildout to its target rollout of 50 markets, this financing gives WCII $1.7 billion in surplus capital with which to expand into the more than 50 markets within the U.S.,
expand outside the U.S. or accelerate business plans within their 50
market footprint. Furthermore, WCII needed, by our estimates,
approximately $700 million of additional funding to get to free cash flow positive, thus the LU financing gives WCII over $1 billion of true net liquidity which obviously lowers its risk profile and clearly will help WCII in the marketplace since financial liability will not be an issue for prospective customers.
Clearly, this is a massive positive for WCII since it completely
eliminates the issue of financing, which, as we wrote in our October 9th First Call note (and subsequent 10/20 report), was not particularly worrisome at any rate given the liquidity WCII currently has, but having it completely eliminated as an issue no doubt will provide a boost to the equity of WCII. In fact, given our very rigorous mathematical approach to calculating discount rates, the fact' that WCII will now have over half of its debt at an 9.5% interest rate will result in a lowering of our discount rate calculation that is behind our previous $37 price target for WCII. Specifically, if we lower wCIS's cost of debt to 12.3% from
16.9% and, to account for surplus funidng, lower WC!I's risk premium used
in the cost of equity calculation to 14.7% from 16.9% (text books suggest
8.4%), the resultant discount rate is 19.2%, down from 21.8% with cost of.
equity dropping to 24.4% from 25.9%. The impact to WCII's price target
is to raise it from *37 to $52 with this price target still implying very
high hurdle rates for a company that has zero funding risk. More
importantly, the Lucent commitment indicates that Lucent fundamentally
believes in the CLEC value proposition in general and in particular
clearly believes that fixed wireless, point-to-multipoint is a viable
local network alternative which is particularly interesting since Lucent
itself really does not manufacture radio equipment. This type of
endorsement also belies having a 19% discount rate or 24% cost of equity
for WCII.
Agreement VALIDATES CLEC STRATEGY & IS AN ENDORSEMENT OF FIXED WIRELESS
as we have indicated in the past, if point-to-multipoint fixed wireless
proves to be a commercially viable technology- -and we firmly believe this
is true--then as much as 60% of the business lines in the U.S. could
theoretically be most economically served via fixed wireless technology
with 25% most economically served by fiber and 15% most economically
served with Bell copper. We believe fixed wireless technology could put
as much as 250 mbps of capacity into a building for less than $20,000 or
roughly $6 per DS-0 circuit. When accounting for the cost of equipment,
radios and hub sites, we believe fixed wireless will be superior to using
the Bells for customer line demands greater than 2 T-1s or 48 lines out
of a building and will not be surpassed by fiber until there are 400-500
or more subscriber lines in service within a building. Clearly WinStar
and Teligent are the only two fixed wireless CLECs with national licenses
and enough channel capacity to make a viable business.
The bottom line is that Lucent's announcement is a validation of the CLEC
strategy in general and most importantly, a very real endorsement of
fixed wireless technology in particular. Specifically for WinStar this
is nothing short of a grand slam home run (Go Yanks:) since it fully
finances them well beyond their current market deployment schedule and is
as good a marquee endorsement as one can get while trying to call on
customers to provide service over their fixed wireless network.
As we said on October 9th when we did our conference call, we felt the
CLEC stocks had been oversold and were selling at discounts beyond a
going-out-of-business scenario. We also stated then that the CLECs
remain good strategic assets with a viable long-term business proposition
and clearly Lucent endorses our positive view of this group. We believe
this announcement will provide a catalyst for the continuation of what
has been a rebound of sorts in the CLECs over the past two weeks. In
addition, we expect other positive.announcements within the CLEC space
over the course of the next few weeks providing further proof of capital
availability as well as some strategic activity. Clearly, we reiterate
our bullish stance on the CLECs that we follow and in particular our Buy
rating on WinStar.
NET/NET: Lucent's move is perhaps the most significant event in the CLEC
industry since the acquisitions of MFS, Brooks and Teleport and provides
a ringing endorsement for the long term value that is likely to be
created on the part of the CLECS. For WinStar, this is the credibility
stamp it needed to prove once and for all that a smart technology player
clearly believes that point-to-multipoint fixed wireless will be a viable
alternative in the local loop competitive arena.
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I'll see if I can get the other reports put up this weekend. Then again IMO, too much me-too "need to post" blather without any technical or fundamental value. Hope everyone who needs to, finds a therapy group to "share" with.
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